##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
  þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended March 31, 2007
 or
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
 For the transition period from  to
 Commission File No.: 000-25805
 Fauquier Bankshares, Inc.
  Virginia
    
    54-1288193(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)10 Courthouse Square, Warrenton, Virginia
    
    20186(Address of principal executive offices)
    
    (Zip Code)
 (540) 347-2700
 Not Applicable
 þ o
 o o þ
 o þ




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##### 



FAUQUIER BANKSHARES, INC.
  PagePart I. FINANCIAL INFORMATION
    
    
    3Item 1. Financial Statements
    
    
    3Consolidated Balance Sheets as of March 31, 2007 (unaudited) and December 31, 2006
    
    
    3Consolidated Statements of Income (unaudited) for the Three Months Ended March 31, 2007 and 2006
    
    
    4Consolidated Statements of Changes in Shareholders Equity (unaudited) for the Three Months Ended March 31, 2007 and 2006
    
    
    5Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 2007 and 2006
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    24Item 4. Controls and Procedures
    
    
    24Part II. OTHER INFORMATION
    
    
    24Item 1. Legal Proceedings
    
    
    24Item 1A. Risk Factors
    
    
    25Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    25Item 3. Defaults Upon Senior Securities
    
    
    25Item 4. Submission of Matters to a Vote of Security Holders
    
    
    25Item 5. Other Information
    
    
    25Item 6. Exhibits
    
    
    25SIGNATURES
    
    
    27
 - 2 -




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##### 



Part I. FINANCIAL INFORMATION
 Fauquier Bankshares, Inc. and Subsidiaries
Consolidated Balance Sheets
 Unaudited
    
    
    AuditedMarch 31,
    
    
    December 31,2007
    
    
    2006AssetsCash and due from banks
    
    $
    24,641,771
    
    
    $
    21,019,764Interest-bearing deposits in other banks
    
    
    3,666,164
    
    
    
    537,891Federal funds sold
    
    
    7,031,000
    
    
    
    20,122,000Securities available for sale
    
    
    38,962,062
    
    
    
    40,352,775Loans, net of allowance for loan losses of $4,518,877 in 2007 and $4,470,533 in 2006
    
    
    411,443,680
    
    
    
    416,061,150Bank premises and equipment, net
    
    
    7,414,422
    
    
    
    7,584,089Accrued interest receivable
    
    
    1,610,104
    
    
    
    1,802,379Other assets
    
    
    13,619,923
    
    
    
    14,282,097Total assets
    
    $
    508,389,126
    
    
    $
    521,762,145Liabilities and Shareholders EquityDeposits:Noninterest-bearing
    
    
    78,524,392
    
    
    
    85,495,160Interest-bearing
    
    
    325,002,102
    
    
    
    330,576,258Total deposits
    
    
    403,526,494
    
    
    
    416,071,418Federal funds purchased
    
    
    14,000,000
    
    
    
    Federal Home Loan Bank advances
    
    
    43,000,000
    
    
    
    55,000,000Dividends Payable
    
    
    671,751Company-obligated mandatorily redeemable
capital securities
    
    
    4,124,000
    
    
    
    8,248,000Other liabilities
    
    
    3,275,493
    
    
    
    3,730,778Commitments and Contingencies
    
    
    
    
    
    
    Total liabilities
    
    
    468,597,738
    
    
    
    483,050,196Shareholders EquityCommon stock, par value, $3.13; authorized 8,000,000
shares: issued and outstanding, 2007: 3,544,493 shares
(includes nonvested shares of 31,190);
2006: 3,478,960 shares (includes nonvested shares of 31,829)
    
    
    10,996,638
    
    
    
    10,789,521Retained earnings
    
    
    29,727,349
    
    
    
    28,962,409Accumulated other comprehensive income (loss), net
    
    
    (932,599
    )
    
    
    (1,039,981
    )Total shareholders equity
    
    
    39,791,388
    
    
    
    38,711,949Total liabilities and shareholders equity
    
    $
    508,389,126
    
    
    $
    521,762,145
  - 3 -




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##### 



Fauquier Bankshares, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
For the Three Months Ended March 31, 2007 and 2006
 2007
    
    
    2006Interest IncomeInterest and fees on loans
    
    $
    7,278,505
    
    
    $
    6,423,438Interest and dividends on securities available for sale:Taxable interest income
    
    
    372,005
    
    
    
    417,837Interest income exempt from federal income taxes
    
    
    13,197
    
    
    
    13,123Dividends
    
    
    50,497
    
    
    
    47,148Interest on federal funds sold
    
    
    42,600
    
    
    
    14,642Interest on deposits in other banks
    
    
    4,790
    
    
    
    4,975Total interest income
    
    
    7,761,594
    
    
    
    6,921,163Interest ExpenseInterest on deposits
    
    
    2,418,627
    
    
    
    1,571,098Interest on federal funds purchased
    
    
    86,843
    
    
    
    37,800Interest on Federal Home Loan Bank advances
    
    
    524,948
    
    
    
    487,812Distribution on capital securities of subsidiary trusts
    
    
    156,101
    
    
    
    85,705Total interest expense
    
    
    3,186,519
    
    
    
    2,182,415Net interest income
    
    
    4,575,075
    
    
    
    4,738,748Provision for loan losses
    
    
    120,000
    
    
    
    120,000Net interest income after
provision for loan losses
    
    
    4,455,075
    
    
    
    4,618,748Other IncomeWealth management income
    
    
    338,873
    
    
    
    327,547Service charges on deposit accounts
    
    
    659,791
    
    
    
    635,939Other service charges, commissions and income
    
    
    424,138
    
    
    
    352,342Gain on sale of property rights
    
    
    
    
    
    
    250,000Loss on sale of securities
    
    
    
    
    
    
    (82,564
    )Total other income
    
    
    1,422,802
    
    
    
    1,483,264Other ExpensesSalaries and benefits
    
    
    2,348,233
    
    
    
    2,183,767Net occupancy expense of premises
    
    
    268,106
    
    
    
    241,153Furniture and equipment
    
    
    287,600
    
    
    
    331,719Advertising expense
    
    
    120,401
    
    
    
    98,264Consulting expense
    
    
    239,942
    
    
    
    289,526Data Processing expense
    
    
    299,681
    
    
    
    271,686Other operating expenses
    
    
    625,216
    
    
    
    688,976Total other expenses
    
    
    4,189,179
    
    
    
    4,105,091Income before income taxes
    
    
    1,688,698
    
    
    
    1,996,921Income tax expense
    
    
    516,218
    
    
    
    599,309Net Income
    
    $
    1,172,480
    
    
    $
    1,397,612Earnings per Share,basic
    
    $
    0.33
    
    
    $
    0.40Earnings per Share,assuming dilution
    
    $
    0.33
    
    
    $
    0.39Dividends per Share
    
    $
    0.190
    
    
    $
    0.175
  - 4 -




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##### 



Fauquier Bankshares, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders Equity
(Unaudited)
For the Three Months Ended March 31, 2007 and 2006
 AccumulatedOtherCommon
    
    
    Retained
    
    
    Comprehensive
    
    
    ComprehensiveStock
    
    
    Earnings
    
    
    Income (Loss)
    
    
    Income
    
    
    TotalBalance, December 31, 2005
    
    $
    10,794,700
    
    
    $
    25,440,838
    
    
    $
    (656,393
    )
    
    
    
    
    
    $
    35,579,145Comprehensive income:Net income
    
    
    
    
    
    
    1,397,612
    
    
    
    
    
    
    $
    1,397,612
    
    
    
    1,397,612Other comprehensive income net of tax:Unrealized holding losses on securities available
for sale, net of deferred income taxes of $330,775
    
    
    
    
    
    
    
    
    
    
    14,302
    
    
    
    14,302
    
    
    
    14,302Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,411,914Cash dividends ($ .175 per share)
    
    
    
    
    
    
    (607,806
    )
    
    
    
    
    
    
    
    
    
    
    (607,806
    )SFAS No. 123(R) implementation adjustment
    
    
    (67,238
    )
    
    
    67,238
    
    
    
    Amortization of unearned compensation,
restricted stock awards
    
    
    
    
    
    
    44,185
    
    
    
    
    
    
    
    
    
    
    
    44,185Issuance of common stock
    
    
    5,027
    
    
    
    34,528
    
    
    
    
    
    
    
    
    
    
    
    39,555Exercise of stock options
    
    
    38,937
    
    
    
    26,760
    
    
    
    
    
    
    
    
    
    
    
    65,697Balance, March 31, 2006
    
    $
    10,771,426
    
    
    $
    26,403,355
    
    
    $
    (642,091
    )
    
    
    
    
    
    $
    36,532,690Balance, December 31, 2006
    
    $
    10,789,521
    
    
    $
    28,962,409
    
    
    $
    (1,039,981
    )
    
    
    
    
    
    $
    38,711,949Comprehensive income:Net income
    
    
    
    
    
    
    1,172,480
    
    
    
    
    
    
    $
    1,172,480
    
    
    
    1,172,480Other comprehensive income net of tax:Unrealized holding losses on securities available
for sale, net of deferred income taxes of $55,318
    
    
    
    
    
    
    
    
    
    
    107,382
    
    
    
    107,382
    
    
    
    107,382Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,279,862Cash dividends ($.19 per share)
    
    
    
    
    
    
    (671,751
    )
    
    
    
    
    
    
    
    
    
    
    (671,751
    )Acquisition of 2,435 shares of common stock
    
    
    (7,622
    )
    
    
    (54,505
    )
    
    
    
    
    
    
    
    
    
    
    (62,127
    )Amortization of unearned compensation,
restricted stock awards
    
    
    
    
    
    
    62,595
    
    
    
    
    
    
    
    
    
    
    
    62,595Issuance of common stock  nonvested shares
(11,437 shares)
    
    
    35,797
    
    
    
    (35,797
    )
    
    
    
    
    
    
    
    
    
    
    Exercise of stock options
    
    
    178,942
    
    
    
    291,917
    
    
    
    
    
    
    
    
    
    
    
    470,859Balance, March 31, 2007
    
    $
    10,996,638
    
    
    $
    29,727,348
    
    
    $
    (932,599
    )
    
    
    
    
    
    $
    39,791,388
 - 5 -




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##### 



Fauquier Bankshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
For the Three Months Ended March 31, 2007 and 2006
 2007
    
    
    2006Cash Flows from Operating ActivitiesNet income
    
    $
    1,172,480
    
    
    $
    1,397,612Adjustments to reconcile net income to net
cash provided by operating activities:Depreciation and amortization
    
    
    259,195
    
    
    
    301,839Provision for loan losses
    
    
    120,000
    
    
    
    120,000Amortization (accretion) of security premiums, net
    
    
    2,797
    
    
    
    9,759Amortization of unearned compensation
    
    
    62,595
    
    
    
    44,185Changes in assets and liabilities:Decrease in other assets
    
    
    799,130
    
    
    
    892,900Decrease in other liabilities
    
    
    (455,285
    )
    
    
    (185,755
    )Net cash provided by operating activities
    
    
    1,960,912
    
    
    
    2,580,540Cash Flows from Investing ActivitiesProceeds from sale of securities available for sale
    
    
    
    
    
    
    3,024,745Proceeds from maturities, calls and principal
payments of securities available for sale
    
    
    987,117
    
    
    
    1,341,200Purchase of securities available for sale
    
    
    
    
    
    
    Proceeds from sale of premises and equipment
    
    
    
    
    
    
    Purchase of premises and equipment
    
    
    (89,527
    )
    
    
    (181,212
    )Proceeds from sale of other bank stock
    
    
    563,500
    
    
    
    Net decrease
(increase) in loans
    
    
    4,497,470
    
    
    
    (16,154,839
    )Net cash provided by (used in) investing activities
    
    
    5,958,560
    
    
    
    (11,970,106
    )Cash Flows from Financing ActivitiesNet (decrease) increase in demand deposits, NOW accounts
and savings accounts
    
    
    (691,634
    )
    
    
    (3,081,639
    )Net (decrease) increase in certificates of deposit
    
    
    (11,853,290
    )
    
    
    8,634,797Federal Home Loan Bank advances
    
    
    25,000,000
    
    
    
    Federal Home Loan Bank principal repayments
    
    
    (37,000,000
    )
    
    
    (8,000,000
    )Purchase (repayment) of federal funds
    
    
    14,000,000
    
    
    
    (2,000,000
    )Repayment of trust preferred securities
    
    
    (4,124,000
    )
    
    
    Cash dividends paid on common stock
    
    
    
    
    
    
    (607,806
    )Issuance of common stock
    
    
    470,859
    
    
    
    105,251Acquisition of common stock
    
    
    (62,127
    )
    
    
    Net cash (used in) by financing activities
    
    
    (14,260,192
    )
    
    
    (4,949,397
    )(Decrease) in cash and cash equivalents
    
    
    (6,340,720
    )
    
    
    (14,338,963
    )Cash and Cash EquivalentsBeginning
    
    
    41,679,655
    
    
    
    27,738,715Ending
    
    $
    35,338,935
    
    
    $
    13,399,752Supplemental Disclosures of Cash Flow InformationCash payments for:Interest
    
    $
    2,436,421
    
    
    $
    1,491,715Income taxes
    
    $
    
    
    
    $
    Supplemental Disclosures of Noncash Investing ActivitiesUnrealized gain (loss) on securities available for sale, net
of tax effect
    
    $
    107,382
    
    
    $
    14,302
  - 6 -




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##### 



Fauquier Bankshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
 1. General
   2. Securities
  Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    (Losses)
    
    
    ValueMarch 31, 2007Obligations of U.S.Government corporations
and agencies
    
    $
    28,536,677
    
    
    $
    1,893
    
    
    $
    (460,989
    )
    
    $
    28,077,581Obligations of states and political
subdivisions
    
    
    963,066
    
    
    
    43,336
    
    
    
    
    
    
    
    1,006,402Corporate Bonds
    
    
    6,000,000
    
    
    
    27,500
    
    
    
    (28,750
    )
    
    
    5,998,750Mutual Funds
    
    
    282,439
    
    
    
    
    
    
    
    (8,530
    )
    
    
    273,909FHLMC Preferred Bank Stock
    
    
    441,000
    
    
    
    29,000
    
    
    
    
    
    
    
    470,000Restricted investments:Federal Home Loan Bank Stock
    
    
    2,873,500
    
    
    
    
    
    
    
    
    
    
    
    2,873,500Federal Reserve Bank Stock
    
    
    99,000
    
    
    
    
    
    
    
    
    
    
    
    99,000Community Bankers Bank Stock
    
    
    50,000
    
    
    
    
    
    
    
    
    
    
    
    50,000The Bankers Bank Stock
    
    
    112,920
    
    
    
    
    
    
    
    
    
    
    
    112,920$
    39,358,602
    
    
    $
    101,729
    
    
    $
    (498,269
    )
    
    $
    38,962,062
 Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    (Losses)
    
    
    ValueDecember 31, 2006Obligations of U.S.Government corporations
and agencies
    
    $
    29,529,836
    
    
    $
    2,029
    
    
    $
    (599,698
    )
    
    $
    28,932,167Obligations of states and political
subdivisions
    
    
    962,814
    
    
    
    48,740
    
    
    
    
    
    
    
    1,011,554Corporate Bonds
    
    
    6,000,000
    
    
    
    27,500
    
    
    
    (42,500
    )
    
    
    5,985,000Mutual Funds
    
    
    279,445
    
    
    
    
    
    
    
    (9,311
    )
    
    
    270,134FHLMC Preferred Bank Stock
    
    
    441,000
    
    
    
    14,000
    
    
    
    
    
    
    
    455,000Restricted investments:Federal Home Loan Bank Stock
    
    
    3,437,000
    
    
    
    
    
    
    
    
    
    
    
    3,437,000Federal Reserve Bank Stock
    
    
    99,000
    
    
    
    
    
    
    
    
    
    
    
    99,000Community Bankers Bank Stock
    
    
    50,000
    
    
    
    
    
    
    
    
    
    
    
    50,000The Bankers Bank Stock
    
    
    112,920
    
    
    
    
    
    
    
    
    
    
    
    112,920$
    40,912,015
    
    
    $
    92,269
    
    
    $
    (651,509
    )
    
    $
    40,352,775
 - 7 -




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##### 



2007Amortized
    
    
    FairCost
    
    
    ValueDue in one year or less
    
    $
    764,789
    
    
    $
    753,902Due after one year through five years
    
    
    14,719,954
    
    
    
    14,526,583Due after five years through ten years
    
    
    5,028,626
    
    
    
    4,957,992Due after ten years
    
    
    14,986,374
    
    
    
    14,844,256Equity securities
    
    
    3,858,859
    
    
    
    3,879,329$
    39,358,602
    
    
    $
    38,962,062
  March 31, 2007
    
    Less than 12 Months
    
    
    12 Months or More
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedDescription of Securities
    
    Fair Value
    
    
    (Losses)
    
    
    Fair Value
    
    
    (Losses)
    
    
    Fair Value
    
    
    (Losses)Obligations of U.S. Government,
corporations and agencies
    
    $
    
    
    
    $
    
    
    
    $
    27,910,070
    
    
    $
    (460,989
    )
    
    $
    27,910,070
    
    
    $
    (460,989
    )Corporate Bonds
    
    
    
    
    
    
    
    
    
    
    1,971,250
    
    
    
    (28,750
    )
    
    
    1,971,250
    
    
    
    (28,750
    )Subtotal, debt securities
    
    
    
    
    
    
    
    
    
    
    29,881,320
    
    
    
    (489,739
    )
    
    
    29,881,320
    
    
    
    (489,739
    )Mutual Funds
    
    
    
    
    
    
    
    
    
    
    273,909
    
    
    
    (8,530
    )
    
    
    273,909
    
    
    
    (8,530
    )Total temporary impaired securities
    
    $
    
    
    
    $
    
    
    
    $
    30,155,229
    
    
    $
    (498,269
    )
    
    $
    30,155,229
    
    
    $
    (498,269
    )
 December 31, 2006
    
    Less than 12 Months
    
    
    12 Months or More
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedDescription of Securities
    
    Fair Value
    
    
    (Losses)
    
    
    Fair Value
    
    
    (Losses)
    
    
    Fair Value
    
    
    (Losses)Obligations of U.S. Government,
corporations and agencies
    
    $
    
    
    
    $
    
    
    
    $
    28,734,320
    
    
    $
    (599,698
    )
    
    $
    28,734,320
    
    
    $
    (599,698
    )Corporate Bonds
    
    
    
    
    
    
    
    
    
    
    3,957,500
    
    
    
    (42,500
    )
    
    
    3,957,500
    
    
    
    (42,500
    )Subtotal, debt securities
    
    
    
    
    
    
    
    
    
    
    32,691,820
    
    
    
    (642,198
    )
    
    
    32,691,820
    
    
    
    (642,198
    )Mutual Funds
    
    
    
    
    
    
    
    
    
    
    279,445
    
    
    
    (9,311
    )
    
    
    279,445
    
    
    
    (9,311
    )Total temporary impaired securities
    
    $
    
    
    
    $
    
    
    
    $
    32,971,265
    
    
    $
    (651,509
    )
    
    $
    32,971,265
    
    
    $
    (651,509
    )
     - 8 -




---



##### 



3. Loans
  March 31,
    
    
    December 31,2007
    
    
    2006(Thousands)Real estate loans:Construction
    
    $
    33,262
    
    
    $
    33,662Secured by farmland
    
    
    1,369
    
    
    
    1,365Secured by 1 - to - 4 family residential
    
    
    168,775
    
    
    
    168,310Other real estate loans
    
    
    133,628
    
    
    
    134,955Commercial and industrial loans (not secured by real estate)
    
    
    40,298
    
    
    
    41,508Consumer installment loans
    
    
    30,472
    
    
    
    31,952All other loans
    
    
    8,613
    
    
    
    9,273Total loans
    
    $
    416,417
    
    
    $
    421,025Unearned income
    
    
    (454
    )
    
    
    (493
    )Allowance for loan losses
    
    
    (4,519
    )
    
    
    (4,471
    )Net loans
    
    $
    411,444
    
    
    $
    416,061
  Three
    
    
    Three
    
    
    TwelveMonths
    
    
    Months
    
    
    MonthsEnded
    
    
    Ended
    
    
    EndedMarch 31,
    
    
    March 31,
    
    
    December 31,2007
    
    
    2006
    
    
    2006Balance at beginning of period
    
    $
    4,470,533
    
    
    $
    4,238,143
    
    
    $
    4,238,143Provision for loan losses
    
    
    120,000
    
    
    
    120,000
    
    
    
    360,000Recoveries of loans previously charged-off
    
    
    7,707
    
    
    
    34,994
    
    
    
    128,463Loan losses charged-off
    
    
    (79,362
    )
    
    
    (73,582
    )
    
    
    (256,073
    )Balance at end of period
    
    $
    4,518,878
    
    
    $
    4,319,555
    
    
    $
    4,470,533
  March 31,
    
    
    December 31,2007
    
    
    2006(Thousands)Nonaccrual loans
    
    $
    1,629
    
    
    $
    1,634Restructured loans
    
    
    
    
    
    
    Total nonperforming loans
    
    
    1,629
    
    
    
    1,634Foreclosed property
    
    
    135
    
    
    
    140Total nonperforming assets
    
    $
    1,764
    
    
    $
    1,774
  - 9 -




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##### 



4. Company-Obligated Mandatorily Redeemable Capital Securities of Subsidiary Trusts
    5. Earning per Share
  Three Months
    
    
    Three MonthsEnded
    
    
    EndedMarch 31, 2007
    
    
    March 31, 2006Per Share
    
    
    
    
    
    
    Per ShareShares
    
    
    Amount
    
    
    Shares
    
    
    AmountBasic earnings per share
    
    
    3,522,550
    
    
    $
    0.333
    
    
    
    3,457,834
    
    
    $
    0.404Effect of dilutive securities, stock-based awards
    
    
    72,603
    
    
    
    
    
    
    
    112,3863,595,153
    
    
    $
    0.326
    
    
    
    3,570,220
    
    
    $
    0.392
 6. Stock-Based Compensation
  - 10 -




---



##### 



1st Qtr2007WeightedAverage
    
    
    AverageNumber of
    
    
    Exercise
    
    
    IntrinisicShares
    
    
    Price
    
    
    Value (1)Outstanding at January 1,
    
    
    177,466
    
    
    $
    9.50Granted
    
    
    
    
    
    
    Exercised
    
    
    (57,170
    )
    
    
    8.24Forfeited
    
    
    
    
    
    
    Outstanding at March 31,
    
    
    120,296
    
    
    $
    10.10
    
    
    $
    1,792,407Exercisable at end of quarter
    
    
    120,296
    
    
    
    
    
    
    $
    1,792,407Weighted-average fair value per
option of options granted during
the year
    
    $
    
 
 (1)
    
    The aggregate intrinsic value of stock options in the table above reflects the
pre-tax intrinsic value ( the amount by which the March 31, 2007 market value of the
underlying stock option exceeded the exercise price of the option) that would have been
received by the option holders had all option holders exercised their options on March
31, 2007. This amount changes based on the changes in the market value of the
Companys stock.   1st Qtr 2007WeightedAverageNumber
    
    
    Grant Dateof
    
    
    Fair ValueShares
    
    
    (Per Share)Nonvested at January 1,
    
    
    31,829Granted
    
    
    10,798
    
    
    $
    25.40Vested
    
    
    (11,437
    )Forfeited
    
    
    Nonvested at March 31,
    
    
    31,190
  - 11 -




---



##### 



7. Employee Benefit Plan
  2007
    
    
    2006Service cost
    
    $
    167,680
    
    
    $
    173,127Interest cost
    
    
    100,343
    
    
    
    93,997Expected return on plan assets
    
    
    (111,378
    )
    
    
    (98,960
    )Amortization of transition (asset)
    
    
    1,942
    
    
    
    (4,745
    )Amortization of prior service cost
    
    
    (4,745
    )
    
    
    1,942Recognized net actuarial loss
    
    
    5,258
    
    
    
    15,239Net periodic benefit cost
    
    $
    159,100
    
    
    $
    180,600
  - 12 -




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##### 



- 13 -




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##### 



- 14 -




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##### 



- 15 -




---



##### 



- 16 -




---



##### 



- 17 -




---



##### 



Three Months Ended March 31, 2007
    
    
    Three Months Ended March 31, 2006Average
    
    
    Income/
    
    
    Average
    
    
    Average
    
    
    Income/
    
    
    AverageBalances
    
    
    Expense
    
    
    Rate
    
    
    Balances
    
    
    Expense
    
    
    RateASSETS:LoansTaxable
    
    $
    411,798
    
    
    $
    7,185
    
    
    
    6.99
    %
    
    $
    381,641
    
    
    $
    6,324
    
    
    
    6.64
    %Tax-exempt (1)
    
    
    7,849
    
    
    
    141
    
    
    
    7.18
    %
    
    
    7,666
    
    
    
    150
    
    
    
    7.82
    %Nonaccrual
    
    
    1,634
    
    
    
    
    
    
    
    
    
    
    
    720
    
    
    
    Total Loans
    
    
    421,281
    
    
    
    7,326
    
    
    
    6.96
    %
    
    
    390,027
    
    
    
    6,474
    
    
    
    6.65
    %SecuritiesTaxable
    
    
    38,285
    
    
    
    423
    
    
    
    4.41
    %
    
    
    45,788
    
    
    
    465
    
    
    
    4.06
    %Tax-exempt (1)
    
    
    1,009
    
    
    
    20
    
    
    
    7.93
    %
    
    
    1,021
    
    
    
    20
    
    
    
    7.79
    %Total securities
    
    
    39,294
    
    
    
    443
    
    
    
    4.50
    %
    
    
    46,809
    
    
    
    485
    
    
    
    4.14
    %Deposits in banks
    
    
    1,888
    
    
    
    5
    
    
    
    1.01
    %
    
    
    734
    
    
    
    5
    
    
    
    2.71
    %Federal funds sold
    
    
    3,329
    
    
    
    43
    
    
    
    5.12
    %
    
    
    1,176
    
    
    
    15
    
    
    
    4.98
    %Total earning assets
    
    
    465,792
    
    
    
    7,817
    
    
    
    6.72
    %
    
    
    438,746
    
    
    
    6,979
    
    
    
    6.37
    %Less: Reserve for loan losses
    
    
    (4,488
    )
    
    
    
    
    
    
    
    
    
    
    (4,302
    )Cash and due from banks
    
    
    14,377
    
    
    
    
    
    
    
    
    
    
    
    18,203Bank premises and equipment, net
    
    
    7,518
    
    
    
    
    
    
    
    
    
    
    
    8,260Other assets
    
    
    15,726
    
    
    
    
    
    
    
    
    
    
    
    15,347Total Assets
    
    $
    498,925
    
    
    
    
    
    
    
    
    
    
    $
    476,254LIABILITIES AND SHAREHOLDERS EQUITY:DepositsDemand deposits
    
    $
    74,309
    
    
    
    
    
    
    
    
    
    
    $
    88,880Interest-bearing depositsNOW accounts
    
    
    70,559
    
    
    
    201
    
    
    
    1.15
    %
    
    
    74,321
    
    
    
    112
    
    
    
    0.61
    %Money market accounts
    
    
    28,646
    
    
    
    102
    
    
    
    1.45
    %
    
    
    40,968
    
    
    
    140
    
    
    
    1.38
    %Premium money market accounts
    
    
    58,062
    
    
    
    576
    
    
    
    4.03
    %
    
    
    40,562
    
    
    
    390
    
    
    
    3.90
    %Savings accounts
    
    
    34,212
    
    
    
    34
    
    
    
    0.41
    %
    
    
    38,045
    
    
    
    30
    
    
    
    0.32
    %Time deposits
    
    
    134,258
    
    
    
    1,506
    
    
    
    4.55
    %
    
    
    105,166
    
    
    
    899
    
    
    
    3.47
    %Total interest-bearing deposits
    
    
    325,737
    
    
    
    2,419
    
    
    
    3.01
    %
    
    
    299,062
    
    
    
    1,571
    
    
    
    2.13
    %Federal funds purchased
    
    
    6,276
    
    
    
    87
    
    
    
    5.61
    %
    
    
    3,419
    
    
    
    38
    
    
    
    4.48
    %Federal Home Loan Bank advances
    
    
    41,322
    
    
    
    525
    
    
    
    5.08
    %
    
    
    41,456
    
    
    
    487
    
    
    
    4.71
    %Company-obligated mandatorily
redeemable capital securities
    
    
    8,156
    
    
    
    156
    
    
    
    7.66
    %
    
    
    4,124
    
    
    
    86
    
    
    
    8.31
    %Total interest-bearing liabilities
    
    
    381,491
    
    
    
    3,187
    
    
    
    3.38
    %
    
    
    348,061
    
    
    
    2,182
    
    
    
    2.53
    %Other liabilities
    
    
    3,541
    
    
    
    
    
    
    
    
    
    
    
    2,616Shareholders equity
    
    
    39,584
    
    
    
    
    
    
    
    
    
    
    
    36,697Total Liabilities & Shareholders Equity
    
    $
    498,925
    
    
    
    
    
    
    
    
    
    
    $
    476,254Net interest spread
    
    
    
    
    
    $
    4,630
    
    
    
    3.34
    %
    
    
    
    
    
    $
    4,797
    
    
    
    3.84
    %Interest expense as a percent of average earning assets
    
    
    
    
    
    
    
    
    
    
    2.77
    %
    
    
    
    
    
    
    
    
    
    
    2.01
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    3.95
    %
    
    
    
    
    
    
    
    
    
    
    4.36
    %
 
 (1)
    
    Income and rates on non-taxable assets are computed on a tax equivalent basis using a federal
tax rate of 34%. - 18 -




---



##### 



Three Months Ended March 31, 2007 Compared toThree Months Ended March 31, 2006Due to
    
    
    Due toChange
    
    
    Volume
    
    
    RateINTEREST INCOMELoans; taxable
    
    $
    861
    
    
    $
    464
    
    
    $
    397Loans; tax-exempt (1)
    
    
    (9
    )
    
    
    4
    
    
    
    (13
    )Securities; taxable
    
    
    (42
    )
    
    
    (73
    )
    
    
    31Securities; tax-exempt (1)
    
    
    
    
    
    
    
    
    
    
    Deposits in banks
    
    
    
    
    
    
    8
    
    
    
    (8
    )Federal funds sold
    
    
    28
    
    
    
    27
    
    
    
    1Total Interest Income
    
    
    838
    
    
    
    430
    
    
    
    408INTEREST EXPENSENOW accounts
    
    
    89
    
    
    
    (6
    )
    
    
    95Money market accounts
    
    
    (38
    )
    
    
    (42
    )
    
    
    4Premium money market accounts
    
    
    186
    
    
    
    168
    
    
    
    18Savings accounts
    
    
    4
    
    
    
    (3
    )
    
    
    7Time deposits
    
    
    606
    
    
    
    249
    
    
    
    358Federal funds purchased
    
    
    49
    
    
    
    32
    
    
    
    17Federal Home Loan Bank advances
    
    
    37
    
    
    
    (2
    )
    
    
    40Company-obligated manditorily
redeemable capital securities
    
    
    70
    
    
    
    84
    
    
    
    (14
    )Total Interest Expense
    
    
    1,005
    
    
    
    480
    
    
    
    525Net Interest Income
    
    $
    (167
    )
    
    $
    (50
    )
    
    $
    (117
    )
 
 (1)
    
    Income and rates on non-taxable assets are computed on a tax equivalent basis using a
federal tax rate of 34%.   - 19 -




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##### 



- 20 -




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##### 



- 21 -




---



##### 



March 31, 2007
    
    
    December 31, 2006Tier 1 Capital:Shareholders Equity
    
    $
    39,791
    
    
    $
    38,712Plus: Unrealized loss on securities available for sale
    
    
    933
    
    
    
    1,036Less: Intangible assets, net
    
    
    (40
    )
    
    
    (6
    )Plus: Company-obligated mandatorily redeemable capital securities
    
    
    4,000
    
    
    
    8,000Total Tier 1 Capital
    
    
    44,684
    
    
    
    47,742Tier 2 Capital:Allowable Allowance for Loan Losses
    
    
    4,519
    
    
    
    4,471Total Capital
    
    $
    49,203
    
    
    $
    52,213Risk Weighted Assets:
    
    $
    393,213
    
    
    $
    404,603Regulatory Capital Ratios:Leverage Ratio
    
    
    8.96
    %
    
    
    9.50
    %Tier 1 to Risk Weighted Assets
    
    
    11.36
    %
    
    
    11.80
    %Total Capital to Risk Weighted Assets
    
    
    12.51
    %
    
    
    12.90
    %
 - 22 -




---



##### 



March 31, 2007
    
    
    December 31, 2006Total
    
    
    In Use
    
    
    Available
    
    
    Total
    
    
    In Use
    
    
    AvailableSources:Federal funds borrowing lines of credit
    
    $
    52,152
    
    
    $
    14,000
    
    
    $
    38,152
    
    
    $
    51,901
    
    
    $
    
    
    
    $
    51,901Federal Home Loan Bank advances
    
    
    136,944
    
    
    
    43,000
    
    
    
    93,944
    
    
    
    139,194
    
    
    
    55,000
    
    
    
    84,194Federal funds sold
    
    
    
    
    
    
    
    
    
    
    7,987
    
    
    
    
    
    
    
    
    
    
    
    20,122Securities, available for sale and unpledged
at fair value
    
    
    
    
    
    
    
    
    
    
    19,889
    
    
    
    
    
    
    
    
    
    
    
    21,070Total short-term funding sources
    
    $
    189,096
    
    
    $
    57,000
    
    
    $
    159,972
    
    
    $
    191,095
    
    
    $
    55,000
    
    
    $
    177,287Uses:Unfunded loan commitments and
lending lines of credit
    
    
    
    
    
    
    
    
    
    $
    56,419
    
    
    
    
    
    
    
    
    
    
    $
    50,801Letters of credit
    
    
    
    
    
    
    
    
    
    
    8,485
    
    
    
    
    
    
    
    
    
    
    
    8,679Total potential short-term funding uses
    
    
    
    
    
    
    
    
    
    $
    64,904
    
    
    
    
    
    
    
    
    
    
    $
    59,480Ratio of short-term funding sources to
potential short-term funding uses
    
    
    
    
    
    
    
    
    
    
    246.5
    %
    
    
    
    
    
    
    
    
    
    
    298.1
    %
  - 23 -




---



##### 



- 24 -




---



##### 



Total Number ofTotal
    
    Average
    
    Shares Purchased
    
    Maximum NumberNumber of
    
    Price
    
    as Part of Publicly
    
    of Shares that MayShares
    
    Paid per
    
    Announced Plan
    
    Yet Be PurchasedPurchased
    
    Share
    
    (1)
    
    Under the Plan(1)January 1  31, 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    208,738February 1  28, 2007
    
    
    1,400
    
    
    $
    25.46
    
    
    
    1,400
    
    
    
    207,338March 1  31, 2007
    
    
    1,035
    
    
    $
    25.59
    
    
    
    1,035
    
    
    
    206,303Total
    
    
    2,435
    
    
    $
    25.51
    
    
    
    2,435
 
 (1)
    
    In September 1998, the Company announced an open market buyback program for its common
stock. Initially, the plan authorized the Company to repurchase up to 73,672 shares of its
common stock through December 31, 1999. Annually, the Board resets the amount of shares
authorized to be repurchased during the year under the buyback program. On January 18,
2007, the Board authorized the Company to repurchase up to 208,738 shares (6% of the shares
of common stock outstanding on January 1, 2007) beginning January 1, 2007 and continuing
until the next Board reset.        3.1
    
    Articles of Incorporation of Fauquier Bankshares, Inc., as amended, incorporated by reference
to Exhibit 3(i) to registration statement on Form 10 filed April 16, 19993.2
    
    Amended and Restated Bylaws of Fauquier Bankshares, Inc., incorporated by reference to
Exhibit 3.2 to Form 8-K filed March 22, 2006
  10.14.1
    
    First Amendment, dated March 26, 2007, to Employment Agreement, dated January 19, 2005,
between Fauquier Bankshares, Inc., The Fauquier Bank and Randy K. Ferrell, incorporated by
reference to Exhibit 10.14.1 to Form 10-K filed April 2, 200710.20
    
    Consulting Agreement, dated April 19, 2007 between The Fauquier Bank and C.H. Lawrence, Jr.
 - 25 -




---



##### 



10.21
    
    Employment Agreement, dated April 2, 2007, between Fauquier Bankshares, Inc., The Fauquier
Bank and Gregory D. Frederick, incorporated by reference to Exhibit 10.21 to Form 8-K/A filed
April 4, 200711
    
    Refer to Part I, Item 1, Note 5 to the Consolidated Financial Statements31.1
    
    Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)31.2
    
    Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)32.1
    
    Certification Pursuant to 18 U.S.C. Section 1350 of Chief Executive Officer32.2
    
    Certification Pursuant to 18 U.S.C. Section 1350 of Chief Financial Officer
 - 26 -




---



##### 



- 27 -